Granite Construction Incorporated — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012. Financial statements are unaudited; amounts below are in millions of dollars except per-share data. Results are seasonally variable and may not indicate full-year performance.
Business context
Granite operates in Construction, Large Project Construction, Construction Materials, and Real Estate. Its core work includes heavy civil infrastructure construction and materials production. The company continued its plan to divest its real estate investment business and focus on core operations.
Key financial results
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Revenue | $728.5 | $728.6 | $1,578.3 | $1,470.0 |
| Gross profit | $101.1 | $93.9 | $178.0 | $168.8 |
| Gross margin | 13.9% | 12.9% | 11.3% | 11.5% |
| Operating income | $61.4 | $60.4 | $59.2 | $59.1 |
| Net income attributable to Granite | $37.1 | $36.5 | $27.3 | $32.4 |
| Diluted EPS | $0.94 | $0.93 | $0.70 | $0.83 |
| Operating cash flow | Not stated for the quarter | $20.2 | $2.0 |
- Q3 revenue was essentially flat year over year; nine-month revenue rose 7.4%. Q3 attributable net income increased 1.8%, while nine-month attributable net income declined 15.8%.
- Q3 gross margin improved, driven principally by Large Project Construction. Nine-month gross margin edged down as weaker Construction segment profitability offset gains in large projects.
- Construction revenue fell 10.5% in Q3 and 4.5% for nine months. Large Project Construction revenue rose 20.0% and 26.3%, respectively; Construction Materials revenue rose 4.3% and 6.5%.
- Construction gross margin declined to 8.6% in Q3 from 13.6%, and to 8.0% for nine months from 11.2%. Large Project Construction margin increased to 22.6% in Q3 from 12.0%, and to 16.7% for nine months from 13.5%.
- Large Project Construction benefited from favorable estimate revisions: $35.9 million in Q3 and $48.9 million for nine months. Construction recorded net unfavorable revisions of $6.0 million and $9.4 million, respectively.
Liquidity, debt and backlog
- At September 30, cash and cash equivalents were $287.3 million and marketable securities were $85.0 million, totaling $372.3 million. Consolidated construction-joint-venture cash of $74.0 million is generally not available for Granite’s working capital.
- Reported debt, including non-recourse real estate debt, was approximately $229.6 million, compared with $250.6 million at December 31, 2011. This includes $208.5 million of senior notes and $21.1 million of non-recourse debt.
- Nine-month operating cash flow was $20.2 million, compared with $2.0 million in 2011, primarily reflecting more favorable working-capital changes. Investing activities provided $48.7 million; financing activities used $38.6 million. Capital expenditures were $26.0 million, and full-year 2012 capital expenditures were expected not to exceed $41.0 million.
- Total construction backlog was $1.59 billion at September 30, down 18.4% from June 30 and 13.7% from September 2011. Construction backlog was $530.3 million; Large Project Construction backlog was $1.06 billion. Contracts may generally be canceled or modified by customers.
- On October 11, 2012, Granite replaced its $100 million revolving facility with a $215 million committed facility expiring October 2016; there were no revolving loans outstanding at September 30. Granite reported compliance with debt covenants at period end.
Outlook, risks and unusual items
- Management expected challenging conditions to continue through the remainder of 2012 and into 2013, citing intense competition, public infrastructure funding constraints, and weak commercial and residential development demand. It was pursuing opportunities in rail, power, water, industrial, and federal markets. MAP-21 reauthorized federal surface transportation funding for 27 months at approximately fiscal 2012 levels, with inflation adjustments in fiscal 2013 and 2014.
- Management expected a $17 million to $18 million gain in Q4 2012 from asset optimization. It said restructuring charges of up to $8 million could be recorded in 2013, depending on market conditions and asset sales.
- One consolidated real estate entity defaulted after September 30 by failing to make a timely property-tax payment. The affected debt is non-recourse to Granite, but recourse to the entity; the entity was discussing disposition of the property with lenders.
- Granite recorded a $2.8 million non-cash impairment of a cost-method investment and a $5.3 million gain from selling gold, a by-product of aggregate production, during the first nine months. The nine-month effective tax rate was 27.1%, versus 22.5% a year earlier; the prior-year rate benefited from a favorable tax-examination settlement.
- Joint-venture obligations can expose Granite to costs beyond its stated ownership share if partners fail to perform. The filing cites approximately $1.6 billion of remaining revenue on unconsolidated and line-item joint-venture contracts, including Granite’s $0.6 billion share, but says maximum additional exposure cannot be quantified.
- Legal matters include a negotiated consent decree and civil penalty for the US Highway 20 stormwater matter; the company said it did not expect a material adverse effect. A federal investigation concerning disadvantaged-business-enterprise subcontracting remained ongoing; Granite said it was cooperating and could not rule out actions or sanctions.
- Granite disclosed inadvertent misstatements of total and partners’ interest in unconsolidated-joint-venture revenue and cost in its prior Q2 2012 filing. Granite’s own interest in revenue, cost, and gross profit was stated to have been correct.
Investor verification points
- Track whether the strong Large Project Construction estimate revisions are repeatable and whether weaker Construction margins and productivity improve.
- Monitor backlog awards and conversion, especially the decline in total backlog and limited significant large-project awards during Q3.
- Verify realization and timing of the projected Q4 asset-optimization gain and any 2013 restructuring costs.
- Follow the real estate affiliate’s default and lender discussions, while distinguishing affiliate-level recourse from Granite’s direct obligations.
- Assess working-capital cash conversion, availability of joint-venture cash, debt covenant headroom, and the terms and collateral provisions of the new credit facility.
- Review developments in the DBE investigation, Highway 20 consent decree, and joint-venture partner performance risks.